Thursday, February 2, 2017

A Rare Trio Of Trends Points To More Upside For Stocks

January’s ability to predict stock-market returns improves in post-election years.

As January goes, so goes the year’s stock market. If that theory bears out, then 2017 will likely be another gratifying year for investors.

The January Barometer is a reference to the belief that the market’s performance in January foretells how stocks will perform from February through December. Devised in 1972, the indicator claims an accuracy ratio of 87.9%, according to Jeff Hirsch, editor of the Stock Trader’s Almanac.

But what has analysts even more excited than the buoyant January effect is the indicator commonly referred to as the “January trifecta,” based on the so-called Santa Claus rally, the market’s direction in the first five days of January, and the January Barometer. This year, all three are higher.

There is some debate whether the market actually witnessed a Santa Claus rally, the gains that usually materialize around the holidays, in 2016 given the S&P 500’s lackluster performance during that period. However, the large-cap index still managed to notch a 1.8% rise in December.

“The predictive power of the three is considerably greater than any of them alone,” said Hirsch in a report.

To see all three indicators rising in tandem is rare, with 2013 the last time this occurred, said Ryan Detrick, senior market strategist at LPL Financial. Since 1950, there have been 28 times the trio has concurrently risen, and 25 times the market gained in the ensuing 11 months for an average return of 12.7%.

January’s capacity to predict stock returns for the rest of the year also gets a boost following a presidential election, according to Dow Jones data. In post-presidential-election years, the Dow followed January’s direction 23 out of 30 years, and for the S&P 500 the success rate was 17 out of 22 years.

Bank of America Merrill Lynch’s research backs up these promising statistics.

“When January is up in Year 1 [of the presidential cycle], the year is up 77% of the time, with an average gain of 13.5% and February-December is up 77% of the time with an average return of 9.3%,” Stephen Suttmeier, technical research analyst at Bank of America Merrill Lynch, said in a note.

But for all the upbeat signs, Andrew Adams, a market strategist at Raymond James, was skeptical about making blind bets on stocks solely based on seasonal patterns.

History and hindsight can guide investors, but “every market is different and must be evaluated based on its own factors,” he said.

And there is a lot that investors have to be wary of. The near–market euphoria sparked by President Donald Trump’s election and his growth-supportive platform has sputtered in recent days as the market comes to terms with the possible repercussions of Trump’s rhetoric and policies, including a temporary travel ban on citizens of several predominantly Muslim countries.

There are also ongoing concerns that valuations are too elevated and that the market is on the brink of a correction.

To be clear, Adams is still bullish and views any market dips as a good entry point into stocks, he said, but he also believes the market may be ripe for a selloff.

There has been a 5% correction in the S&P 500 every 7.1 months since 1932, and it has been 11.2 months since the last bona fide 5% move south from the previous high of 2016, according to Adams. Even counting the brief plunge after Brexit — which he does not view as a true correction — the market is now 7.2 months from the previous 5% drawdown.

Indeed, Adams cautioned investors against being too aggressive about buying into the market as the probability of the next 5% to 10% move being either up or down is about even.

If that gloomy outlook from a bull isn’t enough of a damper, investors should remember that February tends to be a mediocre month for stock returns. The Dow averaged about a 0.1% gain for the month over the past 100 years, according to Bespoke Investment Group.